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Thursday, 10 March 2016

Money is not a store of value. It is a claim upon value

Note: This was originally published as a response to the Aeon Conversations piece 'What is Money'

Money is not a store of value. It is a claim upon value. This might sound like pedantic semantics, but it is crucially important, especially if you’re trying to alter how it works.

Imagine a Coca Cola bottle with Coke in it. That bottle is a store of value. If I open it and drink the Coke, it will kickstart energy processes in my body and help me to carry on surviving. Now imagine a piece of paper next to the bottle that says ‘whoever holds this is entitled to claim this bottle of Coke’. That’s a claim upon value. If a group of people come to believe in the validity of that claim, the note can be passed around as a means to metaphorically ‘transfer’ Coke value, or - more accurately - to transfer access to Coke value. That’s then a form of money.

The fundamental difference between the note and the Coke can be tested by a simple experiment. Burning them. Imagine I drop the Coke into a furnace and it evaporates away. Nobody can ever drink it now, and we have destroyed value. The note is simultaneously rendered meaningless. It’s just a piece of paper saying you can claim a non-existent thing.

Now imagine that instead of incinerating the Coke, I burn the note instead. The Coke remains, and no value is destroyed. All that has happened it that I’ve destroyed my claim to that value.

Let’s scale this vision up now. Imagine a nation of people with energy, intellect and resources to make things. This is real productive capacity, and it a source of real value in the form of real goods and services. Now imagine a piece of paper that says ‘whoever holds this is entitled to claim goods and services from the people of this nation’. That’s a claim upon value. Now imagine that 60 million people believe in that claim. A network like that is so powerful that it’s in nobody’s interest to not believe in the claim.

That’s pretty much like the British Pound, for example.

And if I take my £10 note and burn it, what happens? I’ve destroyed no value. All I’ve done is destroyed some of my personal claim upon the good and services created within the UK.

That’s an act of sacrifice, because the curious thing that occurs as a result of this is that all the remaining claims become worth slightly more. We call that deflation. So, when the Joker in the 2008 Batman film The Dark Knight burns millions of dollar bills, he’s giving up his claim to the underlying value they represent, and transferring it to others.

Of course, it’s a bit more complex than that, because that act of altering the number of claims in the system can induce all manner of economic activity. This is what we sometimes call ‘monetary policy’. Creating new money claims via credit systems is one means of activating and steering real economic activity producing real value.

And the key players in that are not just central banks, but the entire commercial banking sector. Because really, it’s not like most money claims take the form of physical notes any more. Most are data entries, binary code imprints on hard drives of computers within data centres controlled by commercial banks. The act of creating and moving monetary claims around in such a system is the act of editing databases.

And this poses interesting possibilities for designing alternative forms of money. Change the nature of the database, the rules concerning who gets to create claims, and the rules concerning what a valid claim looks like, and you can alter real economic activity in interesting ways.

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9 comments:

Yeah I remember reading this last year. Just caught your exchange with Matt Slater on twitter.

I think your opening statement is ideological. Whether value is located in time and space, whether it is ultimately the product of the mind, or whether its divine : these are questions about our metaphysical commitments.

I think then it might be more elucidating to ask what are those commitments and how does our conception of money (how money IS REGARDED - as Matt says) sit alongside them.

And then there's the issue of reason versus doing. Can we know what something is like just by conceptualizing it, or do we have to experience it? ;) And does our conceptualization of it effect out experience of it, and vice versa.

I think you do great work. And I always try to read what you've written. But I'm a little uncomfortable with the story you're telling here. This narrative about money just seems to create a conception of it that is in opposition to, and hence in some sense defined by commodity theory, and its associated ideologies. I reckon we need to think a little more out of that box.

I guess I don't really have any problem with making metaphysical statements about what I believe in. I honestly believe that if you destroy the underlying goods and services, the money is literally worthless, and I thus just don't think 'store of value' is a very useful characterisation, and I'm not sure why I should back down on that just because the many people have come to fetishise the access token to value as the value itself. Of course we can go all subtle and question whether a distinction really exists, but the world is full of illusions that are maintained by dogmatic inertia, and I have very little problem with trying to advance ideas that run counter to unquestioned dogmas. I mean, it's not like we're short on people constantly reinforcing the idea that money is a 'store of value' out there are we? It's one of the most uncritically unquestioned concepts in the world. I think its good to forcefully challenge it and hopefully induce people into accounting for why they think 'store of value' is actually a valid characterisation rather than just something they've always been told

There's a fundamental problem with your idea, Brett. Suppose I control the Coke bottle. I choose not to trade your note for my coke. The value of another coke (for argument's sake let's assume it's physically homogenous) is different. The nature of Coke AS AN ECONOMIC GOOD has changed. It is logically not homogenous.

Value is subjective, and human beings are able to distinguis h different values from physically identical goods. This is why a Coke in Times Square is a different price than in the Walmart upstate.

Money is not some special thing, it's merely the most commonly traded good in an economy used for indirect exchange.

I don't really understand your argument. I don't see how individual people's contextual perceptions of coke's value invalidate the concept that money is a claim upon that

I'm imagining that you're trying to bring up the old argument that a person will not trade one thing for another if they don't think they will get more advantage from the thing they're trading it for, and thus 'I won't give up my coke if the note doesn't have more value to me'. Well, the reason why the note is preferable is that it gives access to value and it is perfectly plausible to trade something of value for something that gives you access to a range of things of value (aka. a 'claim upon value'). People do not trade real goods and services for money because they think the money itself somehow magically holds the value. They do it because they know that the money gives them access to the real things of value they want

Furthermore, this economic myth that 'people don't have to give up things they've produced for money if they don't want to' is bullshit. Most people literally cannot survive if they don't exchange goods and services for money, because in the context of a highly specialised economy there is no other way to get access to the goods and services you need to survive, other than by going through the money system. There is very little 'choice' involved

I don't really want to go into the depths of arguments about value, but while value might be subjective at a personal level, have you ever noticed how there is a strange tendency for people's subjective perceptions of coke value to weirdly converge around a rough band of roughly stable prices? That's because when you move beyond the subjective fluctuations of individual people's context you start to get closer to the true underlying consensus value on something... which strangely seems to be related to how much energy it takes to produce ('cost of production'). This is to say that if people's 'subjective' perceptions of coke's value do not correspond in some way to the energy taken to produce it, then, well, you just won't find it on a market. There are many things we do not see on markets that we might want, because the costs of creating them do not correspond to the subjective value perceptions.

I disagree with your analysis that modern money is not a store of value. You are missing one key component before money can be a claim on any goods and services, taxation. Sixty million people can't all agree that the British Pound is a claim on wealth, unless the British government can tax it. There needs to be a 100% guarantee people will not stop using the British Pound.

Modern money needs a stronger foundation for transaction than a simple informal agreement. This is why cryptocurrencies cannot work as a transaction. Money has to be centralized or else it creates cataclysmic volatility in the market.

Hypothetically, a few friends and I have decided to create a new currency, gold notes. We can trade gold notes for goods and services within our little group. One day a friend decides he doesn't want to trade in gold notes and make his own currency, iron notes. This will without doubt creates volatility with my gold notes. My friend is not obliged to transact with my gold notes that I have create.

But you still haven't explained why you think money is a store of value. Sure, taxation is one means by which you can get money claims into a position of power within a particular society, but it doesn't follow that they are a store of value...